Moody's upgrades Tata Steel to investment grade with Baa3 issuer rating; outlook stable

The rating agency also said that the new rating is on account of the sustained improvement in Tata Steel's European operations

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Rating agency Moody's Investors Service on September 25 assigned a Baa3 from Ba1 long-term issuer rating to Tata Steel and changed its outlook to ‘stable’ from ‘positive’.

"The upgrade reflects our expectation of the continued strength in Tata Steel's credit profile due to the company's solid market position in India. We expect the company's profitability to increase even as softer steel prices dent revenues," Kaustubh Chaubal, Moody's Senior Vice President, said in a press release.

Moody's said that its rating reflects the company's large-scale globally cost-competitive, vertically integrated steel operations in India.

The rating agency also said that the new rating is on account of the sustained improvement in Tata Steel's European operations, especially following the expected closure of the loss-making upstream operations in the United Kingdom and the company's close association with its parent, Tata Sons.

Moody's in June had revised the outlook on Tata Steel to ‘positive’ from ‘stable’. At the same time, Moody's also affirmed Tata Steel's Ba1 corporate family rating (CFR).

In its ratings rationale, Moody’s highlighted that the company's strong presence in the world's second-largest steel market, India, will be a key driver of the company's credit profile.

The rating firm said in its note that its rating outlook reflects Tata Steel's resilient operations amid a challenging industry environment.

It added that the structural improvement in Tata Steel's capital structure, with an absolute gross debt reduction and the substantial cash generated by the company during the last two fiscal years, has created a lasting buffer to the company's key credit metrics and liquidity, reducing the company's overall credit risk.

Moody’s said rising global interest rates to curb inflation and an increase in Indian steel export taxes have somewhat dampened steel prices. It also said its forecasts for Tata Steel are based on the rating agency's current price sensitivities for steel ($880 per ton for Tata Steel's Indian operations and $1,250/ton for Europe) for fiscal 2023.

Moody's has modeled per ton of metallurgical coal at $308 and iron ore at about $100. For fiscal 2024, it said its forecasts are based on the mid-point of its price sensitivity ranges ($600-$800/ton for steel, $80-$125 for iron ore and $110-$180 for metallurgical coal).

These price sensitivities translate into an EBITDA/ton assumption of $280 for fiscal 2023 and fiscal 2024 for Tata Steel's Indian operations, a 30% decline over fiscal 2022, Moody’s Investors Service said in its note.

Moody's remains cautious in its forecasts and assumes that the business' EBITDA/ton will decline from $180 in fiscal 2022 to around $140 -$150 in fiscal 2023 and further slide to $40 -$50 in fiscal 2024.